Why commercial property may be a better investment than shares

When most people think about passively investing their money they usually consider residential property or shares.

In deciding which one, the logic normally goes something like this:

Residential Property

It’s a physical asset that will hopefully appreciate in value. Tick! It will provide rental income along the way. Tick! Plus, I’m able to make structural improvements to increase my return and there are some great tax breaks available. Tick and tick! That said, the yields are soft (often negatively geared for tax benefits) and the market is quite cyclical. And what if I get nightmare tenants?

Shares

The stock market can be incredibly volatile, providing much higher returns when I sell but this comes with risk. But some of the risk can be reduced by diversifying my portfolio and if I pick my shares well I should benefit from some dividends along the way — I’ll just need to pay a good broker or adviser to make sure I choose the right stocks. Tick!

If you’re weighing up the pros and cons of each investment type, these are all fair enough assumptions.

The big advantage of property investment is its stability. Shares, on the other hand, are attractive because of the potential for higher returns. But what if there were a third option — a type of investment offering the stability of property with the higher yields of the stock market?

The good news is there is. It’s just not an option many people consider when deciding where to invest. But why not choose commercial property?

The advantages of commercial property investment

Investors are starting to move away from the volatility of the stock market and are instead putting their money into commercial property, like warehouses, showrooms and offices.

When you invest in shares, you lose control of your investment. Sure, you choose which company to invest in and when to sell but once you’ve invested, there’s nothing you can do to improve your asset. You can always buy more shares, or reinvest your dividends but you’re restricted. You can either buy or sell, and that’s it. And life can easily become all about checking your share prices several times a day — before bed, first thing in the morning, even while you’re ducking off to the bathroom.

When you invest in a commercial property there are a thousand things you can do to increase the value of your asset and increase your returns. You can renovate, upgrade the façade, improve the internal fit-out, extend your tenants’ leases, rearrange your tenant profile, subdivide, develop, and so on. The options are endless. You really do have the opportunity to be proactive in adding value to your investment. That can be incredibly important if and when the market moves.

But, you might be thinking, surely you can do that on a residential property, too? And yes, you can. But returns on commercial properties are far greater than residential property yields — it’s not unusual for commercial property returns to be north of eight or nine per cent per year, compared to three or four per cent for a residential property. And the leases are longer, too — often five to 10 years or more. That’s a regular, steady income, for a decade.

So if you’re deciding whether to invest in property or shares, make sure to spare a thought for how much control you actually have over your investment and what avenues you have to add value. You might find commercial property gives you the best of both worlds.

If you’d like to learn more about commercial property investment in Australia, contact Properties & Pathways. We’re happy to discuss how to get the best possible return for your investment.